DEEPCASTER LLC
www.deepcaster.com
DEEPCASTER FORTRESS ASSETS LETTER
Wealth Preservation Wealth Enhancement
Financial and Geopolitical Intelligence
MARKET INTERVENTION ACCELERATING,
Stunning Data Releases Show Risks, Consequences, and The Cartel End Game
“Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: we view them as time bombs, both for the parties that deal in them and the economic system.”
“…The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear…”
“…In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Warren Buffet, February 21, 2003
“The fact that the December 13 and 14, 2007 jumps in the PPI and CPI inflation numbers were accompanied by substantial drops in the gold price is quite significant. After examining all the evidence, how can a rational observer conclude anything other than that the price of gold is manipulated?”
Deepcaster, December 14, 2007
This is the sixth in a series of Deepcaster's work originally entitled "Juiced Numbers" regarding Market Intervention and Data Manipulation. The primary topics of this installment are: 1) An overview of the Market Intervention and Data Manipulation Regime, including the recent Releases from the BIS, BLS and The Fed reflecting that market intervention and manipulation; 2) The August – October, 2006 Intervention Phase that took down Crude Oil, as well as Gold and Silver prices; 3) Highlights of the August & September and other 2007 interventions; 4) Cartel Intervention as the key feature of the aforementioned Takedowns; 5) Data Massaging and The Cartel End Game.
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IMPORTANT NOTE: Deepcaster had not planned to prepare an update of its November, 2007 Letter entitled “Market Intervention and Data Manipulation - - Consequences & Forecast for Gold, Crude, Equities and The Cartel End Game” for some months. However, important new data releases from the BIS (Bank of International Settlements - - The Central Bankers’ Bank), the U.S. Bureau of Labor Statistics, and the U.S. Federal Reserve are quite astounding. They reflect a considerable acceleration of Market Intervention. They reflect dramatic increases in OTC Derivatives, and in exchange-traded derivatives, and an apparent intensification of data manipulation. As we demonstrate, these developments dramatically increase systemic risk and also reflect the importance of creating more OTC and exchange-traded Derivatives in order to affect market outcomes. Because of this dramatically increasing systemic risk, we feel it most important to issue this sixth edition of our “Juiced Numbers” series now.
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In order to put the Interventional Takedowns in context, the discussion is interwoven with significant excerpts from "Juiced Numbers #1, 2, 3, 4, and 5, Deepcaster's initial essays describing "How the Government Gets the Statistics it wants, Markets get manipulated, Citizens get Deluded, and Worse."
By describing the aforementioned Interventional Episodes, we provide evidence to the skeptical of the pervasive influence of Market Intervention.
The Interventional Context - - Overview
Deepcaster is periodically asked to explain, and provide evidence for, our view that a U.S. Federal Reserve-led Cartel (apparently composed of the U.S. Federal Reserve, the Bank for International Settlements ("BIS") - - The Central Bankers’ Bank - - and key primary dealers, acting with the cooperation of major Central Bankers) manipulates a wide variety of markets. [Apparently one “operational vehicle” through which The Cartel works is called “The Working Group on Financial Markets” established after the 1987 crash, and which is often informally and widely referred to as “The Plunge Protection Team” or PPT.]
So it is important to explain what we mean by our claim of Cartel Intervention, and to indicate how Deepcaster takes account of that in our portfolio recommendations. [It is important to note that virtually all of the evidence we cite is from publicly available sources as indicated below. For example, the Gold AntiTrust Action Committee has amassed substantial evidence regarding the manipulation of the Gold and Silver Markets at www.gata.org.]
First, we do not (usually) mean that the Cartel totally controls prices in any particular market. Various markets are affected in varying degrees, at varying times, by Cartel manipulation attempts. Cartel actions can substantially affect, but usually do not totally control, prices in many markets - - though they certainly have that capacity much of the time. The price of Crude Oil is relatively difficult to manipulate, for example, but is not immune from substantial manipulation (as we shall show).
It is important to note that the degree of manipulation, and, therefore, control, varies from time to time and market to market. In markets such as the (relatively) small cap markets for Gold and Silver securities, Cartel manipulation attempts can have much more impact and are, at times, and for certain time periods, tantamount to control.
To answer the exceedingly important question regarding how the markets are manipulated one must recognize that there are two main methods of manipulation.
I. DIRECT MANIPULATION
Direct intervention appears to be accomplished primarily via two vehicles: Repo Injections from The Fed and via the Over The Counter (OTC) derivatives reported by The Bank for International Settlements (see www.bis.org, and details below). The Fed makes injections of Repos (Repurchase Agreements - - usually TOMOs - - Temporary Open Market Operations typically expiring in 1 to 30 days) into the market nearly every business day. Repurchase agreements are loans (at Fed Fund rates) issued daily by the Federal Reserve to primary dealers, the proceeds of which can be used to buy, for example, Dow index futures, if the Fed seeks to boost the Dow. The total amount of un-expired Repos on any given day constitutes the “Repo Pool.” Monitoring changes in Repo Poll levels (which is publicly available information) is crucial to determining how the Interventions will likely affect the markets.
Thus, the several primary dealers (e.g. Goldman Sachs, J.P. Morgan), who apparently work under the Fed's direction, are able to use these loaned funds to buy or sell various securities and futures to affect the markets. [Note: One species of Repos, POMOS, never has to be repaid, but explaining the significance of that (beyond the obvious) is beyond the scope of this article.] The fact that the loaned funds can be used to purchase derivatives (as well as plain equities) gives the manipulators the tremendous leverage which derivatives afford.
But along with that tremendous leverage comes tremendous and tremendously increasing (as the recent data releases described below indicate) systemic risk.
Repo additions are made nearly every business day in amounts typically ranging from $1 to $15 billion. Thus, every business day we know the size of The Repo Pool, and whether The Pool is increasing or decreasing.
The Challenge: Determining the Impact of The Interventionals
The challenge for investors and forecasters is to determine where (i.e. in what Sector/s) and how (immediately, in increments, etc.) the funds will be employed. Deepcaster and those very few others, who monitor the daily Repo injections, make educated forecasts of where and how such funds are likely to be used based on patterns, tendencies, and judgments. But no outsider can know for sure (So where is the transparency, Ben?).
Those who doubt whether the Cartel has the capacity to manipulate the markets (and especially the larger markets like the multi-trillion dollar currency and bond markets) are invited to inform themselves about the multi-trillion dollar derivatives colossus at J.P. Morgan Chase, or the $346 trillion in June 2007 (up from $291 trillion in Dec. 2006) derivatives position at the Bank for International Settlements (the Central Banker's Bank) devoted to “Interest Rate Contracts” (see www.bis.org. Then follow the path: Statistics>Derivatives>Table 19). Note that that Derivatives figure increased by some $55 trillion in just six months!
Attitudes of The Fed/Treasury/BIS Toward Intervention
Regarding the awareness and intentions of the leaders of the U.S. Treasury and the U.S. Federal Reserve concerning market manipulation and public perceptions, it is instructive to review what their leadership has said.
Former Secretary of the Treasury, Larry Summers, for example, in his own treatise "Gibsons Paradox and the Gold Standard," indicates "determination of the general price level then amounts to the micro economic problem of determining the relative price of gold," Journal of Political Economy, page 529, 1989.
This much publicized conclusion indicates that our monetary and financial leadership know that in order to manage the general price level and interest rates it is necessary to determine the relative price of gold. Therefore, of course, it follows that capping the price of gold (and, by necessity, the price of that other “monetary metal” silver) would be extremely important.
Regarding allegations of "news management" (which some have indelicately called "news manufacturing") we refer you to the words of the Fed Chairman B.S. Bernanke himself, in his September, 2004 Treatise on "Zero Bound Rate Systems." Note Deepcaster's underlines which call attention to the use of "communications policies" to "shape public expectations," and to the use of the Central Bank's balance sheet and the “targeted purchase” of Treasury Securities (yes, The Fed purchases the Treasury’s own paper) to achieve Fed goals:
"Monetary Policy Alternatives at the Zero Bound:
An Empirical Assessment (non-technical summary page i)
In this paper, we apply the tools of modern empirical finance to the recent
Experiences of the United States and Japan to provide evidence on the potential Effectiveness of various nonstandard policies. Following Bernanke and Reinhart (2004), we group these policy alternatives into three classes: (1) using communications policies to shape public expectations about the future course of interest rates; (2) increasing the size of the central bank's balance sheet, or "quantitative easing"; and (3) changing the composition of the central bank's balance sheet through, for example, the targeted purchases of long-term bonds as a means of reducing the long-term interest rate." (emphasis added)
http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf
To Deepcaster all this indicates that the Fed-led Cartel will go to significant lengths necessary to control long-term interest rates (in addition to short term rates, which, it is widely acknowledged, they also control), cap the price of gold and otherwise achieve Central Bank ends.
An excellent analysis of the defects of the “U.S.” Federal Reserve - - so far as the United States’ National Interest is concerned - - is well documented in G. Edward Griffin’s superb book, The Creature From Jekyll Island: A Second Look at the Federal Reserve).
The one conclusion that one can make from this is that the failure to take account of the power, force and pervasiveness of Cartel Manipulations (i.e. The Interventionals) is an invitation to financial and investment suicide.
The profound impact of these manipulation efforts has been most well documented regarding the price capping of the gold market. For those who have any doubts whatsoever about the fact and extent of government (Central Banks) manipulation, we have (thanks to Bill Murphy, founder of the Gold Antitrust Action Committee) the following June, 2005 blatant admission of manipulation by the Head of the BIS (Bank for International Settlements - - i.e. the Central Bankers' Bank) Monetary and Economic Department, W.R. White:
"…it is perhaps worth spending a minute on what is meant by Central Bank cooperation…{it includes]…last, the provision of international credits and joint
efforts to influence asset prices (especially gold and foreign exchange) in
circumstances where this might be thought useful…"
For skeptics, Deepcaster asks: What could be clearer than that?
Interventional Indicators and Helpful Tips
Indeed, if one looks at the Interventional Indicators, the fact that the manipulation takes place is amply documented. First we have the aforementioned quote from W.R. White, Head of the Bank for International Settlements (BIS), in which he explicitly acknowledges manipulation of the gold and currency markets.
In addition, the aforementioned Bernanke statement in his academic paper "Zero Rate Bound Economies" can reasonably be taken as a justification for the Fed purchasing its own paper, otherwise known as monetizing the debt. Specifically, regarding long bond purchases, the purpose of this would be to boost the 10 and 30-year bonds, and, therefore, reduce long-term interest rates.
From the Fed's point of view, these takedowns would presumably reflect a national policy to support the housing market by lowering interest rates, thus encouraging continuing robust consumer spending mainly through the vehicle of the Home-ATM. In addition, it is very much in the Fed's interest to focus investors' funds on purchase of their paper (and, especially, their 10-year Note) and to buoy their fiat currency. In this way, the Fed maintains and enhances its power. But the “U.S.” Federal Reserve is owned by private international banks and is not a U.S. government entity.
[As an historical note, recall that President Kennedy was unhappy with Fed policy and therefore caused U.S. Notes to be printed as a substitute for Federal Reserve Notes. The issuance of these Notes ceased shortly after President Kennedy's assassination.]
Caution for Investors and Traders
Finally, we issue a word of caution to our readers. So long as The Cartel is in a very active interventional mode (e.g. as in taking down the price of Gold, Silver and Oil) do not be lured into thinking that the periodic up spikes in the prices of Gold, Silver and Oil present a "breakout" or a buying opportunity. As a practical matter, technical breakouts are sometimes a lure designed to suck in more "longs" prior to a subsequent deeper takedown.
One of Deepcaster's goal is to identify interim bottoms of Gold, Silver, Crude Oil, and other key markets, and thus to help readers profit from their inevitable resurgence, and ascendance to new heights.
It is essential to study the Fundamentals and Technicals even though the Interventions can override the Fundamentals and Technicals. One must study the Fundamentals not only for all the usual reasons but also because Fundamentals somewhat constrain the timing and effectiveness of Interventions by The Cartel.
Similarly, one should study the Technicals for all the usual reasons and, in addition, because it is in The Cartel’s interest to make its actions seem technically plausible in order to continue to “run mainly under the radar.” It is not in The Cartel’s interest to make its Interventions any more visible than they already are. Indeed, there is powerful evidence that The Cartel often uses and/or helps create technical patterns which lure certain investors (such as hard asset investors) into getting “off sides” before Cartel actions such as taking down the price of Gold or Silver.